Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

9 Tax-Related Myths About Selling Your Home

It feels weird to finally say that out loud (er, yes, the blog counts as out loud).

I have lived in my current home in Philadelphia for fourteen years: my entire adult life, more or less. In that time, I’ve stored up a whole houseful of memories. I have hosted Thanksgiving dinners in my dining room and cocktail parties on my porch. I brought my children home from the hospital to banners and balloons stretched across my front door. My kids learned to walk in this house and ride their bikes on the sidewalk out front. I wrote my first blog post while staring out the window on the third floor.

And now, we are moving on.

It has all happened so fast that I haven’t really had time for it to sink in. We haven’t even had time to list the house yet. When my husband told his friend about that last bit, his friend told us that it was too bad we couldn’t take advantage of the capital gains exemption since we wouldn’t be living in the house at sale.

Um, what? (Yes. My husband gets his tax information from his friends. It wouldn’t do to, oh say, ask the tax attorney in the house. But I digress.)

As it turns out, there is a lot of misinformation and confusion floating around about the sale of personal real estate. Here’s a quick rundown of nine real estate tax-related myths:

You can’t claim the capital gains exemption if you’re not living in the house at the time of sale. For some reason, many taxpayers think you have to live in your house while it’s listed in order to claim the exclusion. Nope. The exclusion – which is up to $250,000 of the gain from your income ($500,000 for married taxpayers) is available to taxpayers who have owned and lived in their home for two of the five years prior to sale. The years don’t have to be sequential: you can live in the house in year one and in year five and still qualify. However, if you’re planning on renting your home out while you’re there, it complicates things a bit and you’ll have to pro rate the exclusion accordingly.

You can’t claim the capital gains exclusion unless you’re over the age of 55. It used to be the rule that only taxpayers age 55 or older could claim an exclusion and even then, the exclusion was limited to a once in a lifetime $125,000 limit. The Taxpayer Relief Act of 1997 changed all of that. Now, age is just a number. And you can buy and sell as much as you want during your lifetime so long as the other criteria apply.

You can’t claim the capital gains exclusion unless you invest the proceeds from your home into the purchase of a new house. Again, under old law, if you sold a house before May 7, 1997, you could only claim the exclusion if you used the proceeds from the sale of your home to buy another house within two years; this was sometimes referred to as the “rollover rule.” This rule no longer applies. The IRS doesn’t care what you do with the proceeds from the sale (your spouse may, however, care just a little).

You can claim the capital gains exclusion for any number of homes. You can only claim the exclusion for one house at a time. For purposes of the capital gains exclusion, the sale must be your principal residence. That means that you can’t claim the exclusion and then claim the exclusion for a vacation house or other property that use for investment purposes. However, if you sell your primary home and move into your vacation house or investment property for two years (and otherwise meet the criteria), you can take the exclusion on a subsequent sale.

You’re stuck with a capital gain on the sale of a house since you can only offset the gain with a loss from another sale of a house. Notwithstanding the fact that you can’t claim a loss on the sale of your home (see #6), gains don’t have to match up in order to offset. You don’t have to offset gains from stocks with losses from stocks or gains from bonds with losses from bonds. The same idea is true with gains from the sale of real estate. With few exceptions, a gain is a gain is a gain.

“Obamacare” imposes a 3.8% additional tax on the sale of all real estate. Under the new health care law, a Medicare tax of 3.8% will be imposed on investment/unearned income for high income taxpayers. High income taxpayers means those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000. Investment income includes, for this purpose, gain from the sale of your home. But wait: the $250,000 exclusion (or $500,000 for married taxpayers) still applies for purposes of the Medicare tax no matter what your income level. If your income is below the threshold, the Medicare tax does not apply. If your income is above the threshold but your gain is under the exclusion, the Medicare tax does not apply. If your income is above the threshold and the gain from the sale of your home is more than the exclusion, the Medicare tax does apply but only on the portion of the gain that’s more than the exclusion amount.

Moving expenses are always deductible. Gosh, this would be awesome if it were true – only it’s not. You can only deduct moving expenses which are work-related and even then, there are strict rules about qualifying expenses. Moving expenses when you move for personal reasons – even if they’re really, really good personal reasons – are never deductible.

So there you go. If you’re contemplating selling your home, you should be all set. But do me a favor? Ask your tax professional if you have any additional questions – and not your drinking buddy.

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Comments

First thanks for the author’s summary of these property taxes information. It seems that there are a lot of misunderstanding of tax among general public. I assume that the reason is each year government issues numerous tax regulations, and while adding new laws the old laws exist still. In last 100yrs, tax law grows exponentially. Of course, it costs a lot labor and resource to creates these law and also demand many law interpreters. Selling and buying a house is very common but it’s getting more and more difficult to general tax payers to do it correctly. Wish some day tax is simple and easy.

I had no idea that there were so many benefits to selling a home. It seems as though the Taxpayer Relief Act of 1997 made selling a home more favorable to everyone that participates. Making the capital gains tax exempt and eliminating the age restriction gives all homeowners a tax break by not contributing to taxable income. Whereas, if the gain were not exempt, homeowners might be selling their homes undervalue to decrease their potential taxable income compared to what it would be if it were sold at market value. Nonetheless, because of this allowed exclusion, I believe sellers will be more enticed to fix up their homes prior to putting them on the market so they can increase the value of the property and ask for a higher selling price.

In my opinion, the myth regarding being able to deduct repair expenses would only make sense if the repairs or improvements did not add to the overall value of the house. If it were true, that would be a double tax benefit to the seller for an expense that was incurred once.

All of these laws are important to know when getting ready to sell a home and I am glad I received this information years in advance now I will be able to pass it along.

I had no idea that there were so many benefits to selling a home. It seems as though the Taxpayer Relief Act of 1997 made selling a home more favorable to everyone that participates. Making the capital gains tax exempt and eliminating the age restriction gives all homeowners a tax break by not contributing to taxable income. Whereas, if the gain were not exempt, homeowners might be selling their homes undervalue to decrease their potential taxable income compared to what it would be if it were sold at market value. Nonetheless, because of this allowed exclusion, I believe sellers will be more enticed to fix up their homes prior to putting them on the market so they can increase the value of the property and ask for a higher selling price.

In my opinion, the myth regarding being able to deduct repair expenses would only make sense if the repairs or improvements did not add to the overall value of the house. If it were true, that would be a double tax benefit to the seller for an expense that was incurred once.

All of these laws are important to know when getting ready to sell a home and I am glad I received this information years in advance, now I will be able to pass it along.

I don’t know there are so many benefits and limits about selling your home until I read this. It is a little bit complicate for people to understand and do it. Most people sell their house might because they change the job location and they have to move to other cities. If people want to get exemption, they should live in the house for two years. But it doesn’t have to be sequential. If people live in the house just 18 months and sell it, they won’t get the exemption.

This was a very interesting article to me personally, as I should be able to give my parent’s some tax advice while they are deciding whether to move or not. Most of these issues I have heard them bring up from time to time. Specifically, they mentioned bringing the house up to speed by painting and improving it. I think the rule of not being able to deduct these costs is well purposed, otherwise there would be nothing stopping every individual from doing this very thing if they knew they would be able to deduct it in the long run. Also, I think many of the changes to the capital gains exclusion have helped booster home sales, as many individuals will be willing to sell if they know that they can exclude the gain on their appreciated property. I believe that there should be some way to deduct losses, seeing it is not always the property owners fault for a decline in value. For example, the surrounding homes and area can have a large impact on the price of a specific home.

It is never a simply thing to sell your home and then buy a new one. People care about which kind of house they want to live, they care about if they lose money if pricing a home too low, but they also care about the exclusion and capital gain directly in their 1040. Thanks to the author, these above myths explains clearly about misunderstanding of exclusion and capital. The result brought from selling a home subconsciously stimulates the real estate business. For example, one can claim the capital gains exclusion whatever you invest the proceeds. This article reminds all the home seller not only considering a house that is visually appealing and in good condition to attract potential buyers driving down the street, but also in which condition they can get their taxable gain lower.

This is what happens when you have a Tax code that has somewhere around 70000 pages. Which I believe works in favor of the IRS because they don’t have to help you get all of your deductions and they have this massive code to pull out exceptions to everything if they feel like auditing you. all I have to say about the examples in the article is that all nine seem to be correct.

One thing that always gave me trouble in 341 was estate taxes. Given that we didn’t too much into the topic, this article sheds some light on some of the issues that I have had. Seeing that some of the tax rules for selling your home have been changed within the last 2 decades, I feel it creates a huge incentive for home selling and buying, especially with the revised capital gains exclusion. My parents have lived in the same house for 25 years so i haven’t had to deal with these issues, but it’s nice to know for future references so if they have questions about selling their home I can give some advice.

This passage makes me understand more about capital gains or losses on sale house.it’s true that you must report and pay tax on capital gains from the sale of a personal reside. We may claim a capital loss on investment property (such as stocks and bonds and real estate). Realized gain/loss=amount realized-adjusted basis. As mentioned #7 cost of painting and other improvements improved the adjusted basis, it is a good way to make people concern the quality of the house though it will be sold.